The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

New Tax "Goodies" Are Here

Sep 24, 2010

The Small Business Jobs Act of 2010 was just recently passed by both the House and Senate and President Obama will sign it when he gets back from China. This Act has several tax "goodies" for farmers and it also has some not so good "goodies". A recap is as follows:

Section 179 Expensing- Earlier in the year, the law increased the expense deduction up to a maximum of $250,000. This Act increases that amount to $500,000 and the phaseout does not start until you purchase at least $2 million of equipment. For almost all farmers, these numbers will be more than enough. This provision applies to any tax years that begin in 2010 and 2011. Therefore, for this year and next, a farmer could purchase up to $1 million in equipment and deduct the whole amount. Again, the income limitations of Section 179 apply and remember to not buy equipment just for the tax deduction.

Bonus Depreciation- The 50% bonus depreciation has been extended to December 31, 2010. This means that any equipment will qualify for immediate 50% deduction and the remainder will be depreciated using current methods. Most single purpose agricultural facilities will also qualify.

First year Auto Deduction - Depreciation deductions for autos and light trucks have been increased by $8,000. Therefore, instead of the current deduction levels of about $3,000, you can now write off $11,000 in the first year.

Five-Year Carryback of Small Business Unused General Business Credits- Many farmers have accumulated general business credits that they may not have been able to offset against income tax due to the alternative minimum tax (AMT) or other reasons. The new Act allows these credits to now completely offset the AMT and if there are any excess credits, they can be carried back five years instead of the current one year. A small business is defined as revenues of less than $50 million so this provision should apply to almost all farmers.

Reduced Recognition Period for S Corp Built In Gains - Previously, if you converted from a C corp to an S corp and you sold in property with in a 10 year period that had a built in gain, you were required to pay an extra tax on these gains. For tax years beginning in 2011, this period has been shortened to five years for all of the S corps who have been changed for at least five years. Therefore, if you converted to an S corporation on or before January 1, 2006, you no longer have to worry about the built-in gains tax at all. If you converted after that date, you are still subject to the 10 year rule.

Deduction of Health Insurance Against Self-Employment Taxes - This provision will apply for almost all self-employed farmers. Currently, you could deduct your health insurance premiums for your family against other income, but could not deduct it against your self-employment taxes. For 2010 only, you can now deduct these costs against your self-employment income. This could easily save up to a $1,000 in self employment tax for many farm families.

Cell Phones Are No Longer Listed Property- Under the current law, cell phones and other similar telecommunication devices were considered listed property which means that a taxpayer needed to keep a log of their business use of these devices and back out the personal use on their income tax return. I am sure all of our farmers were following this rule closely. However, beginning with this year, you no longer need to keep track of this use and a cell phone paid for by the business should be 100% deductible. Now if the business is paying for all minor children's cell phones, that would probably still not be deductible.

These are the tax goodies. What are the "baddies"?

Information Reporting for Rental Income - Beginning in 2011, you will now be required to file a form 1099 for all services provided real estate rental investors paid in excess of $600 for the year. This means you will need to get the name, address and identification number from all of your service providers for repairs, accountants, etc. and report those payments beginning in early 2012.

Increase Penalties For Not Filing Information Returns - Beginning with 2011, if you fail to file any information return timely, the penalty for this failure to file increases dramatically. There are three different tiers of penalties related to the type of information return such as 1099, W-2, etc. In summary these penalties will increase as follows:

Tier 1 - From $15 to $30 per return, maximum from $25,000 to $75,000 per calendar year;

Tier 2 - From $30 to $60 per return, maximum from $50,000 to $200,000 per calendar year;

Tier 3 - From $50 to $100 per return, maximum from $100,000 to $500,000 per calendar year.

These penalties can be dramatic, however, the IRS has some leeway in waiving the penalty for reasonable cause, etc. For example, assume you are a large orchard operation that hires up to a 1,000 workers to pick your fruit, etc. If you fail to timely file your W-2 for the year, the penalty for this failure could be $100,000 or more. With the other new rule passed earlier in the year for filing form 1099 for all transactions exceeding $600, any failure to file these returns can cost a farm easily $25,000 to $100,000 or more. Start getting your record keeping system updated now.

As you can see from the recap of provisions, there are more substantial tax "goodies" than "baddies". As long as you properly report your information returns, the benefit from this Act far outweighs the cost.

Any farmers who are having a good year and need to upgrade their equipment, this is the year to take advantage of the expanded Section 179 provisions or purchase the maximum amount by the end of this year and another $500,000 in 2011 and you will be able to write all of the equipment cost off. With a combine at $300,000 or more, it does not take too much new equipment to get you to the $500,000 ceiling.